As widely anticipated, overnight the ECB held benchmark interest rates steady at 0.75 percent with President Mario Draghi reiterating the central bank’s pledge to buy the debt of Europe’s troubled periphery. “We are ready to activate bond purchases and we have a fully effective backstop. Now it’s in the hands of governments,” Draghi noted in the ensuing press conference. It’s clear the ball is in Spain’s court and markets will be watching closely in the coming days to ascertain Prime Minister Mariano Rajoy’s willingness to request a bailout at the expense of his country’s sovereignty. Markets are clearly hoping Spain’s budget reforms and bank stress test report released last week will pave the way for a formal request for financial aid. Both of these a considered critical housekeeping before financial assistance will be requested, in-turn unlocking the ECB’s bond market intervention program. Until now, Prime Minister Mariano Rajoy has displayed reluctance to any formal request for aid, which effectively places Spain at the mercy of the troika at the expense of the country’s sovereignty. Earlier this week Rajoy rejected reports a bailout request may come as soon as this weekend.
Meanwhile Spanish debt markets continue to enjoy the residual support of Draghi’s grand plan with an auction overnight met with solid demand with a sale of two and five-year bonds fetching lower costs than previously, although a sale of 3-year bonds reflected slightly higher prices. Draghi’s comments rejuvenated the Euro’s appeal with a break to the upside of $US1.30 following the press conference. Risk currencies coat-tailed the Euro higher with the Aussie dollar rising to highs of 102.75 US cents after slumping to fresh monthly lows yesterday’s domestic session.
The release of the Sept. FOMC minutes prompted a moderate retracement across risk currencies with the greenback staging a reversal across the board. The September meeting saw the committee announce additional purchases of mortgage-backed securities to the tune of $40 billion per month, in an effort to kick-start economic growth and employment. In addition, the Fed will maintain its existing program known as operation twist, while extending policy to reinvest maturing debt and mortgage-backed securities. The Fed’s forward guidance was also extended with the statement showing the committee believes “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” In previous correspondence, the Fed had forecast exceptionally low rates through mid-2014. The Fed noted the reboot of its asset purchases should put “downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” While all but one committee member (Jeffrey Lacker) dissented to further asset purchases, the minutes show members remain cautious given the unknown repercussions. Overall the minutes provided a dovish assessment of domestic conditions while flagging “possible intensification of strains in the euro zone, with potential spillovers to U.S. financial markets and institutions and thus to the broader U.S. economy.”
In the absence of local market moving data, we expect the Australian dollar will track regional equity markets in the domestic session ahead of tonight’s all important non-farm payroll data in the U.S. Investors will also be watching closely Japan with the Bank of Japan’s policy decision on today’s docket.